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JK Harris stresses the importance of knowing if you are self-employed
NORTH CHARLESTON, S.C. – You don’t have to own a business to be considered self-employed by the IRS. In fact, a good number of people who are self-employed don’t own a business at all.
“A lot of people don’t consider themselves self-employed because they get paid by commission…they get a 1099,” said Augie Ortega, Vice President of JK Harris Advisors, LLC. “If you don’t work for an employer and don’t get a W-2, you are considered to be self-employed.”
JK Harris Advisors provides financial planning services, including written tax and financial plans and ongoing advice. These services are designed to help clients deal with tax liabilities, if applicable, and identify, establish and achieve their financial goals and objectives.
According to the IRS, you are self-employed if you carry on a trade or business as a sole proprietor; are a member of a partnership or Limited Liability Company that files a Form 1065, U.S. Return of Partnership, that carries on a trade or business; are otherwise in business for yourself; or have a part-time business, in addition to your regular job.
You don’t have to actually make a profit for the IRS to consider you a trade or business as long as you have a profit motive. You do need to make ongoing efforts to further the interests of your business.
“A lot of people are both, meaning they work for an employer and they have a part-time or side business. This includes those who sell goods at a flea market or work as an independent sales representative.”
Being self-employed, a taxpayer is subject to a self-employment tax, a Social Security and Medicare tax that is primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes employers withhold from wage earners.
The IRS requires that these and applicable income taxes be paid quarterly as an Estimated Tax Payment. If not paid quarterly, the taxpayer is subject to penalties for late payment. The IRS has two basic methods of calculating Estimated Tax Payments. A taxpayer can pay an amount based on the total taxes paid the previous year or pay at least 90 percent of the estimated taxes that will be due in the current year.
“There is one thing we caution about being self-employed,” Ortega said. “You have to pay your Estimated Tax Payments. We recommend that you put money aside for these payments, maybe in a Money Market account so you earn interest on it.”